Bubble talk catches fire among big-money pros
There was a surprising amount of bubble talk at the Milken Institute's Global Conference in Los Angeles last week.
Top investors and economists spoke publicly about their fear of inflated values for various securities and the broader economy-a decidedly less optimistic view compared to recent years at "Davos with palm trees."
"I do see many signs of the bubble of the future-the default specter that you're talking about. I agree that short term we're not likely to see that, but all the danger signs are there of a future crisis," Marc Rowan, co-founder of $161 billion private equity firm Apollo Global Management, said during a panel discussion.
"Covenants have been stripped away, cov-lite is the norm, senior debt levels are actually higher than they were in 2007, although total debt is not quite where it was," Rowan added, noting looser lending terms given to borrowers.
"We're back to doing exactly the same things that were done in the credit markets in the crisis."
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"It's just indiscriminate buying. There are no covenants whatsoever. It's covenant light and there's just no creditor protections. PIK-toggle is back in a big way," James Litinsky, founder of investment manager JHL Capital Group, said of leveraged loans and high yield bonds while speaking on a separate panel.
"PIK-toggle" refers to a "payment in kind" bond that allows the issuers to defer paying interest on the note for a higher rate later on, essentially trading a cash payment for a new bond.
"We've seen this movie before. We know how it ends," Litinsky added. "We don't know where we are-maybe there's another year to go but as we know, when psychology changes, it changes fast."
Justin Slatky, a senior portfolio manager at credit-focused investment firm Shenkman Capital Management, agreed while speaking on the same panel.
"We're definitely in the part of the cycle...where it is true that everybody is rushing into new deals. It is true that many people are not doing the amount of work that they were, even six months ago," Slatky said.
"When you do get to that part of the market, it doesn't mean you're are the precipice of an implosion. But it does mean you need to be much more careful about the risks you take, inside of whether it be part of a credit or equity portfolio," he added.
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Nouriel Roubini , the chairman of Roubini Global Economics a professor at the Stern School of Business at New York University, warned that global central banks could cause the next crisis if they continue to use monetary policy to stimulate growth.
"The risk is that they exit too late and they cause the mother of all bubbles," Roubini said. "We saw what happened last time around: Every boom and bubble eventually leads to a bust and a crash,"
The economic forecaster, sometimes called "Dr. Doom" for his pessimistic views, said the economic bubble popping was not a risk in the next year, but could be in the next 24 months. "I would worry about that one," Roubini said during a macroeconomic panel discussion.
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Joshua Harris, another co-founder of large private equity firm Apollo, also noted the effect of the Federal Reserve .
"The quantitative easing and the excess money and the low interest rates have driven pricing up of almost all financial assets to beyond what their intrinsic value might be," Harris said.
"So even though we can all chat about the benevolent growth environment that exists in the U.S. and to a lesser extent globally, the ability to make money and invest wisely on that is very, very challenging right now because you're starting at a point in the valuation cycle that is very, very aggressive."
Harris added that it's a "time to be cautious" and that Apollo is still looking for investments in sectors that are still relatively depressed. "Almost every asset is overvalued," he said.
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-By CNBC's Lawrence Delevingne.
